The telecoms sector has continued to underperform both the FTSE 100 and the FTSE All-Share indices,...
The telecoms sector has continued to underperform both the FTSE 100 and the FTSE All-Share indices, with fairly depressing performance against both benchmarks.
Over 12 months to the end of May, the sector dropped just over 42% ' over 32% worse in performance terms than the FTSE 100, which dropped 9.71% over the same time period and over 33% worse than the All-Share, which dropped 9.24% over the past year.
Vodafone, the beleaguered mobile telecommunications giant, makes up the majority of this sector, accounting for just under 67%. The BT Group, which spun off its mobile division mmO2 last year, is the second largest with 23.55% of the All-Share telecoms index.
Vodafone has had a particularly rocky start to the year, losing 45.53% of its share value since January. Trading at 98p as of 10 June, down from a high of 195p in December, Vodafone has recovered slightly from its year-low of 89.75p on 7 June.
The picture is slightly less gloomy at BT, trading at 268.5p as of 10 June. The company has managed to add just over 6% to its share price since January when it had a year low of 210p.
Hugh Priestly, chief investment officer at Rathbones, says BT seems to be an exception in the telecoms sector at the moment. The company has experienced a turnaround since January, which Priestly ascribes to a number of factors.
'A new management team, including BT chairman Sir Christopher Bland, who joined in November last year, and chief executive officer Bernardus Verwaayen, who joined in February, has steered a new course for BT,' he says. 'The spin-off of mmO2, BT's mobile unit, has also helped by bringing in cash and stemming the losses. BT is the main holding for Rathbones within the sector, adds Priestly, although the group is underweight telecoms as a whole. He remains gloomy on the outlook for the sector and sees no reason to increase his exposure in the near future.
Money that was previously in telecoms has been reinvested in more defensive industries such as food, manufacturing or cyclicals, he adds. John Hatherly, head of research at M&G, is also broadly pessimistic on telecoms. Most funds at M&G are underweight the sector and despite telecom share prices dropping he still does not see value in this area of the market.
One of the biggest touted prospects for mobile telecoms companies is new revenue streams generated from data traffic carried on third generation (3G) networks, which are currently being deployed. However Hatherly says these networks are taking a long time to come online and there is also some scepticism on the long-term outlook for 3G. 'As much as Vodafone tries to talk up prospects for 3G, no-one believes much progress has been made ' there is a major credibility gap,' he says. 'It certainly is not inspiring people to go out and top up on Vodafone shares,' he adds, pointing to the recent share price drops.
At Dresdner RCM, Nigel Lanning, director of European equities, is almost 20% underweight on the sector, primarily because he too is unconvinced about the future of 3G. 'The market is taking a cynical view ' 3G is not proven as yet. What people are not going to do is bet on hope ' Vodafone was suggesting meaningful revenues won't come from 3G until 2005,' he says.
Better outlook for BT.
Telecom share prices have fallen.
New revenue stream potential from 3G.
Too many 3G licence holders in UK.
3G has so far failed to materialise.
Problems at Vodafone.
Moves to overweight equities and fixed income
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